FY10, Q1 growth to go up on inflation index update

NEW DELHI: The government will update the national income figures with the new inflation index, which could see an increase in the gross domestic product growth rate for 2009-10 and the first quarter of the current year.
The GDP figures for August-September will be released on Tuesday.

A similar restating of industrial growth numbers with the new wholesale price index announced in August this year saw an upward revision of up to 1.5 percentage points in some months.

The new WPI series with 2004-05 as base year had shaved off 1.3 percentage points from the inflation figure for August calculated on the older WPI series.

“We will provide the growth estimate for the second quarter based on a new deflator,” said a senior official with the ministry of statistics, close to the process of finalizing the national income accounts. He added that the government would simultaneously release the restated first quarter estimates of 2010.

The growth estimates would probably get a leg up as the industrial sectors, which account for approximately 20% of the overall GDP, got a boost in the second quarter due to the lower inflation numbers under the new series.

The industrial production numbers increased for 11 out of the total of 17 sectors when restated using the new series, resulting in an absolute increase in the value of the index. Industrial growth for August was revised upwards by 1.35 percentage points to 6.92%.

The industrial production data for many products is available in value terms, while in most cases only quantities are known. Converting them to either value or quantity denomination requires use of price indices.
Lower inflation numbers in the new series will give a statistical boost to industrial growth estimates and national income numbers, compared with those estimated using the old series.

Moreover, the compilation of quarterly estimates is a complicated exercise, especially in the first half of the year, as the amount of information available is limited, leaving statisticians to use a fair amount of extrapolation of key indices. The available data are mostly in current prices. National accounts, therefore, use ‘deflators’ to neutralise the impact of increase in prices on GDP growth and arrive at value of output of goods and services in constant prices.
The headline growth number is the increase in value of goods and services at constant prices.

The deflator is calculated using various measures of price increases such as the WPI, which means the decline in the wholesale price inflation in the new series will also change the deflator used in calculation.

In the cases where information is not available, earlier estimates are extrapolated.

“We will get new sectoral growth rates,” the official said, confirming a likely significant revision in GDP numbers. Recently finance secretary Ashok Chawla had said that he expected growth rate in the second quarter to be around 8.8%. Other economists have also kept their forecasts intact and most expect the economy to grow in the range of 8.5-8 .8%.
GDP expanded 7.9% in the second quarter of 2009 and 8.8% in the first quarter of 2010, which would be higher now.

The exact direction of change will depend on the change in the deflator and how many items are divided and how many are multiplied by the new deflator. Even though the WPI and the deflator utilize similar components the weighting scheme is different.